Employees vs independent contractors – understanding the difference

Today, I want to talk about the issue of employees vs independent contractors and the importance of understanding difference between.

Under Australian law, if you are an incorporated business (for example a Pty Ltd business) any person who is deemed to be an employee is covered by the FairWork Act.

What this means, is that the person who is considered an employee has rights such as minimum rates of pay, selected leave and superannuation entitlements and even unfair dismissal protection.

If the person is not an employee, then these rights don’t apply.

So as a business owner, you need to understand what rights apply to the resources you deploy in your business.  If for example, you treat someone as a contractor and they are subsequently deemed to be an employee, you could be up for a lot of back pay and even worse case scenario be convicted of Wage Theft.

Therefore, it is important that you understand the difference.

And whilst there has been various case law that considered this matter, most of this has been overturned by the Closing the Loopholes No 2 legislation that came into effect on 26 August 2024.

This legislation introduced a new test for determining whether the person you are engaging is an employee captured under the FairWork Act or a contractor who can operate outside the FairWork Act.

It is a 2-step process.

Firstly, a person can elect to opt out the new rules.  But this can only be done if the individual worker’s earnings exceed the ‘contractor high income threshold’. For the 2024 – 25 year this is set at $175,000.  An independent contractor is able to revoke the opt out notice at any time, should they wish to do so.

If the person does not elect, (either they don’t want to do or are below the contractor high income threshold), then they are tested on the ‘real substance, practical reality and true nature of the relationship’ between the person engaged and the business.

You can no longer rely on the words of any agreement.  You (and FairWork and the Courts if necessary) must consider:

1. the totality of the relationship between the individual and the person; and
2. in considering the totality of the relationship, regard must be had to not only the terms of the contract governing the relationship but also to other factors relating to the totality of the relationship, including (but not limited to) how the contract is performed in practice.

In practical terms, focus now moves to how the work done by the individual is actually performed and based on what has been considered by FairWork and the Courts.

Factors to consider include:

1. The Amount of Control Over Work: The higher the control the more likely employee than operating independently.
2. Mode of Remuneration: If the person is paid on a set number of hours at an hourly rate is consistent with employment rather than independent contracting.
3. (In)ability to Delegate Work: Can the person delegate work or do they have to do the work themselves.
4. Who provides the Equipment: More provided by the business is more indicative of an employment relationship.
5. Nature of Work: For example, was the work of a professional, trade, or distinct calling that would typically characterize an independent contractor.
6. Key Performance Indicators (KPIs): Are these daily task orientated or outcome based.
7. Contractual Terms: Make sure you don’t have the word employee in the agreement if they are supposed to be a contractor.
8. Lack of Business Independence: Is the person delivering the work operating their own business.

In summary, if you don’t want the risk that someone who think as a contractor is subsequently deemed to be an employee, you need to go and have a look at your arrangements with any “independent contractors”

And don’t for get to consider contractors not located in Australia as this case here shows that even people not located in Australia could be an employee and covered under the FairWork Act.

Contact Wayne on wayne@arealcfo.com.au or 0412 227 052.

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Want a confidential discussion on your business situation, help with your grant application or to learn more about my Outsourced CFO Services, simply email me at wayne@aRealCFO.com.au or call me on 0412 227 052